A Contrast of Agency Remuneration Structures: The Performance-based System and the Commission-based System

There are several compensation systems existing which clients use to pay their agencies. However, it generally depends on the perspective of the client which structure they choose to utilise; whether they want to pay the agency for the work they produce, the success of the work they produce, or a flat rate fee or commission.

The Commission-based system is the traditional, yet now less frequently used (Belch et al, 2012), form of compensation. As agencies were saving the media time, money and effort on sales and collections, “the media allowed the agencies to retain a 15% media commission on the space or time they purchased on behalf of their clients” (Arens et al, 2009). This means, for instance, if a magazine space cost $200,000, an agency would bill the client $200,000, retain 15% ($30,000) and pay the media $170,000 for the space.

The Performance or Outcome-based system, in contrast, is much less ‘standard’, but is becoming increasingly popular (Belch et al, 2012). This method sees the agency being compensated depending on how well they meet predetermined goals. These goals can include “objective measures such as sales or market share, as well as more subjective measures such as evaluations of the quality of the agency’s creative work” (Belch et al, 2012).

The two structures are very different, and they are so because the Performance-based system grew from the Commission-based system as the latter was increasingly being criticised (Shimp, 2010). Where the Performance-based system relies on the agency’s accountability, Belch et al (2012) states that the Commission-based system encouraged agencies to recommend creative solutions that would require higher priced media spend in order to obtain a larger commission. In this way, agencies were seen as valuing higher commissions over providing the best solution (Arens et al, 2009; Spake et al, 1999), and it is generally through the use of a number of different IMC programs (not just commission based tools) which helps produce better results (Shimp, 2010). Another key contrast between the two structures is that the Commission-based method provides more ‘security’ in terms of payment for the agency, whereby some Performance-based systems can entail negative payment results if the campaign does not meet objectives. For instance, DDB Needham takes the “risk” (Spake et al, 1999) of offering its clients a “guaranteed results” program, where if the campaign is successful, the agency earns more, but if it fails, the agency earns less (Arens et al, 2009). This is an issue for some agencies, because while this system acts as a value for money method for the client, campaign success can be subject to factors external to the agency’s control (Linton, n.d.). While the two structures are quite obviously and intentionally different, Linton (n.d.) and Belch et al (2012) indicate that they are slightly similar in that the Performance-based system includes media commission, as well as fees and payments by results.

In essence, the Performance-based compensation system seemly encourages agencies to create work not because it is business, but because a better execution that meets the client’s objectives will be far more rewarded monetarily than that of agencies adopting the traditional Commission-based system.

References

Arens, W. F., Schaefer, D. H., & Weigold, M. (2009). Essentials of Contemporary Advertising (2nd ed.). New York: McGraw-Hill/Irwin.

Belch, G. E., Belch, M. A., Kerr, G., & Powell, I. (2012). Advertising: An Integrated Marketing Communication Perspective (2nd ed.). North Ryde, NSW: McGraw-Hill Australia.

Linton, I. (n.d.). Advertising Agency Fee Structures. Retrieved May 10, 2015, from Small Business: Chron: http://smallbusiness.chron.com/advertising-agency-fee-structures-57126.html

Shimp, T. A. (2010). Advertising, Promotion, and other aspects of Integrated Marketing Communications (8th ed.). Mason, Ohio: South-Western Cengage Learning.

Spake, D. F., D’souza, D., Crutchfield, T. N., & Morgan, R. M. (1999). Advertising Agency Compensation: An Agency Theory Explanation. Journal of Advertising, 28 (3), 53-72. doi:10.1080/00913367.1999.10673589

Connected Cars are Shaping the Media Landscape

The development of “Connected Cars” (cars equipped with an internet connection) will not only change mobility, but they will also inevitably change the future of the media landscape through the automotive infotainment systems already being integrated into vehicles.

The possibilities and capabilities for connected cars are seemingly endless, however, there are logistical roadblocks. Greenough (2015) states, “By 2020, BI Intelligence estimates that 75% of cars shipped globally will be built with the necessary hardware to connect to the internet.” However, Forbes (2015) argues that real action will not transpire until concrete relationships between Carmakers and Telecommunication Companies are made. Logistically, it’s easy to understand difficulties in determining whether the car is included on the telecom bill as another ‘device’, or if it will be an ongoing monthly connectivity fee paid to the carmaker. Forbes (2015) also highlights the issues in terms of customer security, reliability and safety in terms of what and how much is available through the connected car. This leads to another issue mutually discussed within the literature; content, particularly advertising, within a connected car must be useful and non-invasive. Wong (2015) indicates that instead of loud and intrusive advertising, the goal is “to capitalize on those opportunities when consumers actually invite brands to participate in the everyday moments in their lives that matter most.” What better way to effectively target consumers than by creating a new mix of media (digital and online, OOH, and radio) and integrating it into connected cars in a way that will make consumer lives easier by, as Wong (2015) and Walford (2014) both suggest, predicting schedules, desires and needs.

As Wong (2015) and Walford (2014) mention, personalisation and targeted ads is one way for brands to capitalise from the connected cars innovation. By targeting consumers in their cars, the recency effect is at it’s highest, and thereby the convenience of a timely ad will steer customers towards purchase opportunities. Wong (2015) and Uminski (2015) indicate that advertisers will be able to discover opportunities created by the real-time data. For example, the integration of a GPS system and a weather forecast system could supply opportunities for cafes to alert drivers nearby of the conditions, and suggest a hot beverage at a discounted price. Similarly, music-streaming apps like Pandora with thumbs up and down functions (which is already a feature in many cars (Kirchner, 2014)) have opportunities to personalise the drivers music experience, as well as the digital radio ads that are played through the service (for example, while listening to relaxing music, ads for a day spa would be played). Each function of the connected car infotainment system has the potential to build a consumer ‘profile’ through user history (much like cookies are used with online advertising) which will better aid advertisers through targeting their ads to the right people at the right time, either through direct infotainment system alerts (Data Driven Marketing, 2014), or through third party media suppliers such as Pandora. Additionally, this extent of media opportunities will allow advertisers to track, measure and optimise advertising processes in real-time (Wong, 2015). This new media platform will give brands a much deeper insight into consumer behaviour, particularly in the way they react to products and services that are more tailored and timely than ever before.

With the large amount of people driving cars every day, and an even larger amount of people using the internet every day, it is only inevitable that the Connected Car will be the next major media platform for advertisers with so many opportunities for brands to build stronger, more personalised relationships with their consumers.

References

Data Driven Marketing. (2014, August 26). Highway to Future: Connected Cars. Retrieved May 6, 2015, from Internet Innovators: http://internetinnovators.com/index.php/post-en/highway-to-future-connected-cars/

Forbes. (2015). 10 Obstacles For Connected Cars. Retrieved May 6, 2015, from Forbes: http://www.forbes.com/pictures/mkk45ihlk/10-obstacles-for-connected-cars/

Greenough, J. (2015, February 13). The ‘connected car’ is creating a massive new business opportunity for auto, tech, and telecom companies. Retrieved May 6, 2015, from Business Insider: http://www.businessinsider.com.au/connected-car-forecasts-top-manufacturers-2015-2

Kirchner, C. (2014, August 6). Pandora Founder Talks iTunes Radio, Beats and Future. Retrieved May 6, 2015, from GottaBeMobile: http://www.gottabemobile.com/2014/06/08/iphone-6-video-concept-shows-ios-8-exciting-features/

Uminski, C. (2015, January 9). CES 2015: Connected car data will transform advertising and media strategies. Retrieved May 6, 2015, from Marketing Magazine: http://www.marketingmagazine.co.uk/article/1328608/ces-2015-connected-car-data-will-transform-advertising-media-strategies

Walford, L. (2014, May 19). In connected cars, advertising will come along for the ride. Retrieved May 6, 2015, from TechHive: http://www.techhive.com/article/2156981/in-connected-cars-advertising-will-come-along-for-the-ride.html

Wong, B. (2015, April 26). The Future of Advertising: Farewell, Mass Marketing. Retrieved May 6, 2015, from The Wall Street Journal: http://www.wsj.com/articles/the-future-of-advertising-farewell-mass-marketing-1430105034